Many households find themselves in overwhelming debt, made especially difficult with high interest rates and numerous bills. Consolidating your debt can simplify the process and lower interest rates, making debts much more manageable.
Here are some tips on debt consolidation to make sure that doesn’t happen to you.
Check your credit score
Knowing your credit score will give you a good idea of what type of rates you can
look to consolidate. Reviewing your report for potential errors can also help increase your score, further lowering your interest rates and lowering monthly payments.
Any of the three major agencies will be able to provide these reports for free without any harm done to your credit score.
Know your lender
There are innumerable lenders willing to help with debt consolidation, but it is important to make sure you work with a reputable one such as D. Thode & Associates Inc. in Penticton, BC.
It could be as simple as going to the bank, opening a credit card with a low introductory rate and transferring all your balances over.
Local banks and credit unions will also have debt consolidation programs that could be worth looking into. Before going into business with any online or third-party lender, make sure to check reviews and who they are regulated by.
One big red flag is a lender offering debt consolidation regardless of your credit score.
Read the terms and conditions
It is important to know what fees you will be paying, how long an introductory interest rate will last, how long the payments will last, and if there is a penalty for paying the debt off early, etc.
Many credit card companies will offer 0% interest for 6 months or a year, which is a great deal if you are able to pay the debt off that quickly.
Typically, however, the APR will raise exorbitantly after the introductory period, often as high as 20%. There can often be fees for transferring debt as well, so it is important to know exactly what they are.
If the fees are higher than the interest savings on the debt, you could be losing money when consolidating.
Explore other options
Depending on the type of debt you are looking to consolidate, there could be better options. Federal student loans could have low interest rates to begin with, so taking a period of forbearance could provide the temporary debt relief more effectively than consolidation.
Borrowing against a retirement plan or home equity might also be more cost-effective than straight consolidation. To manage your debt, it is important to explore all options and possibly seek advice from a financial professional, if at all possible.
Not all debts are created equally. Consolidating student loan debt, for example, will often remove the option the original lender providers for forbearance or deferment.
If debt is especially heavy and might not be manageable either way, the penalties from the new lender could be more severe than it would be otherwise.
Remember that not all debt has to be consolidated. Check the interest rates on all debts and make sure they aren’t currently lower than the consolidation rate.
Pay above the minimum
The end goal to debt consolidation is creating a more manageable debt so it can be dealt with as effectively as possible and paid off eventually. Budget carefully and make room for paying more than just the minimum payment.
These additional payments will typically go purely towards the principal of the loan and, therefore, help you pay off the debt many times more quickly than just paying the minimum, where a good portion goes towards paying interest.
In the end, debt consolidation can help provide relief for many people who find themselves in debt. It is important to take the time and do proper research to make sure debt consolidation is right for your financial situation and which lender will be able to provide the most relief.
Careful budgeting and paying down your debt will be critical in your path to living a debt-free life.
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